Brazil sweetens $6.9 billion Libra field sale terms to lure bids

Brazil sweetens $6.9 billion Libra field sale terms to lure bids

RIO DE JANEIRO (Bloomberg) -- Brazil is easing the terms of an auction to develop Libra, the country’s largest oil find, after fewer than expected companies signed up for the sale.

The group that wins the contract at an October 21 auction will be required to give 50 % of output to the government until costs and investments are covered, according to new terms published in the Official Gazette. Under original rules, the government’s share would rise to 70 % after two years of production. The group offering the government the largest share after costs are covered wins the contract upon paying a $6.9 billion signing fee.

Brazil, which expects Libra will generate billions of reais to fund public education and health, has failed to auction a bullet-train project this year and to renew some utility licenses after contract terms led investors to shy away.

China National Petroleum Corporation and Royal Dutch Shell are among 11 oil producers registered to participate at the Libra auction, which Brazil’s oil regulator expected to attract more than 40 companies. The move to sweeten the rules comes after Augusto Nardes, head of the court overseeing government spending, said the higher returns would improve the “legal security” of the contract.

“The change is good for the industry,” Adriano Pires, head of the Brazilian Center for Infrastructure in Rio de Janeiro, said by phone. “It’s a good incentive.”

Libra, which holds as much as 12 Bbbl of oil, is located in the ultra deep region known as pre-salt underneath the Atlantic seabed, which holds the largest group of crude discoveries this century. Petroleo Brasileiro, which expects pre-salt deposits to double its output by 2020, will hold at least 30 % of each pre-salt field auctioned by the government and control operations.

Small Turnout

Total, Ecopetrol and China National Offshore Oil Corporation are also among companies registered to bid. The “surprisingly small” turnout was caused by a limited amount of geological data, a lack of experience with the government’s production-sharing model and the potential size of investments, Bank of America analyst Frank McGann said in a September 19 note to clients. The number of participants was about a quarter of the more than 40 companies expected by the regulator, Magda Chambriard, the head of Brazil’s oil agency ANP, told reporters in Rio on September 19.